Report: Office rents spike, demand sluggish

NEW YORK (CNNMoney.com) -- Rents for office space jumped in the first quarter, but demand for space is still sluggish, according to a published report.

The Wall Street Journal reported that a survey of the nation's 79 largest markets excluding New Orleans showed rents in the nation's office buildings increased 2.8 percent in the first three months of the year.

A report says office rents jumped in the first quarter despite relatively weak demand for space.

The paper reports that New York real estate research firm Reis Inc. says that's the biggest jump since the peak of the last office boom nearly seven years ago.

But it also said that demand for space continued to cool from the pace of early last year. The demand is measured by absorption, or the net gain in occupied space. For the third straight quarter absorption was off the pace set when the office recovery began in earnest in the middle of 2004, according to the report.

Tenants absorbed 10 million square feet of space in the first quarter. While that's an improvement from the 8.1 million square feet in the fourth quarter, it's well below the peak of the market seen from the two years starting in the third quarter of 2004, when there was an average of 15.7 million square feet absorbed every three months.

Reis CEO Lloyd Lynford told the paper that the rent jump is a lagging indicator of an office market's health and thus the spike in rents is not a sign of long-term strength.

""The car is moving really, really fast," he told the paper, referring to the big rent jump. "But there's a question about how much gas remains in the tank."

The restrained pace of new construction has helped support rents even in the face of slowing demand, according to the report. But the market will face pressure from developers' plans to open 76 million square feet of new office space by the end of this year, according to the report.

Demand for office space is directly linked to job growth and companies' expectations about the economy. Mediocre job growth for the last several months has thus damped demand for new space, the Journal reported.

Rent increases are uneven, helped by higher jumps in some cities. New York rents jumped 6.5 percent in the first quarter, according to the report, while those in San Francisco were No. 2 with a 5.6 percent gain.

The quarter also saw a $23 billion purchase of Equity Office Properties, the nation's largest office space owner, by a group led by private equity firm Blackstone Group. Blackstone won a bidding war with another major office space landlord, Vornado Realty Trust (Charts).

Vornado and other major office property owners, such as Boston Properties (Charts), Brookfield Properties (Charts), Mack-Cali Realty (Charts) and S.L. Green Realty (Charts), all saw their shares spike during the bidding war for Equity Office Properties, but all have since seen their shares return to near pre-bidding levels.

Blackstone wins Equity Office battle